GBP/USD drifting with eye on inflation report

• UK inflation expected to rise
• Fed widely expected to pause rate increases

The British pound is trading quietly on Tuesday. In the European session, GBP/USD is trading at 1.2397, up 0.10%.

UK inflation expected to rise

The Bank of England has had a rough time in its battle with inflation, to put it mildly. Inflation in the UK is at a higher level than any other G-7 economy, at 6.8%. While inflation has been falling in most of the major economies, the UK is bracing for a rise in inflation in August, from 6.8% to 7.0%. The core rate is expected to drop a notch, from 6.9% to 6.8%. Unless there is a huge surprise on the downside, the inflation release will support the BoE raising rates at Thursday’s meeting, even though the economy is struggling and higher rates raise the chances of a recession.

Most of the major central banks have ended their tightening cycles or are close to it. The BoE is expected to raise rates on Thursday, but what the BoE is planning after that is unclear. If inflation is different from the forecast, it could shake up the British pound and also force a change in inflation projections.

The Fed concludes a two-day meeting on Wednesday and is virtually certain to hold rates at the target range of 5.25%-5.50%. This doesn’t mean that the rate announcement will be a sleeper. Investors will be keeping an eye on the Fed dot plot, which was last updated in June.

The dot plot indicated that the Fed expected to increase rates one more time before the end of the year. Will that projection remain in place after tomorrow’s expected pause? As well, the dot plot signalled rate cuts of 1% in 2024 but that may have changed. If the Fed delivers a ‘hawkish pause’, which would not be a surprise, the future markets will likely respond by repricing a higher likelihood of a rate hike before the end of the year. Currently, the odds of a quarter-point hike stand at 28% in November and 38% in December, according to the FedWatch Tool.

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GBP/USD Technical

• GBP/USD is putting pressure on resistance at 1.2436. Above, there is resistance at 1.2495
•  There is support at 1.2325 and 1.2267

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